First of let me state that I am not a specialist in the area to which this page
is devoted. I am just a regular 401K lemming. And in 2000-2003, like many
other 401K lemmings, I was taken for a ride :-). After that there were crash of 2008 during
which this page was considerably improved. Now there is third "neoliberal" crash in the air and I
started the third round of updates of this page as readership dramatically increases during
uncertain times like autumn 2015 and drops almost to zero during "good times" ;-)

After that 2000 I realized that
something was deeply wrong with the neoliberal economic system
and tried to analyze the situation. I created many pages during my study of neoliberal economic
system, multiple spreadseets adn even simulation models in Perl and R. Only some of them are
reproduced on this site.

My impression is that neoliberal economics (aka
casino capitalism)
functions from one crash to another. The two recent were in 2000 and 2008. The next crash
is given, taking into account hypertrophied role of financial sector under neoliberalism, the sector
that introduces strong positive feedback look into the economic system. And it is this
positive feedback loop that precipitate crashes. So crashes are built-in into the fabric of
neoliberalism and they tend to became more severe with time. Just compare the scale of 2000 and 2008
crashes. But at the same time neoliberal elite tries to protect themselves from those
gyrations with golden parachutes but want to give everybody else a lottery in place of a
pension. They decimates "defined benefit" pensions (replacing them with 401K which offloads all
systemic risks of neoliberalism to individuals) and now are attacking Social Security.
Replacing SS with investments that allow people to fall through the cracks is not a good idea.
In other words the neoliberal elite is antisocial in a very precise meaning of this word.

Any attempt of the society to put some sand
into the wheels in the form of increasing transaction costs or jailing some overzealous bankers or
hedge fund managers are blocked by political power of financial oligarchy, which is the actual
ruling class under neoliberalism. Neoliberals believe that life is a kind of war that should
be waged by any means necessary, including exploiting greed, and using deception. They are animated
by their contempt for ordinary people, as well as by their belief, often openly stated, that man is
the most vicious animal of all, and life is a series of battles ending in victory or defeat. It
looks like they try to build their success by ticking off each of the seven deadly sins.

By nature, human beings are meant to be believers. We aren’t skeptics. We believe, and only at
the second step do we subject our beliefs to scrutiny That makes us very vulnerable to skilled
deception: We are inclined to believe in deceptive claims unless we have a previous reason not to
believe them. And it in this case it's too late.

For ordinary investor (who are dragged
into stock market by his/her 401K) accumulating sufficient retirement funds became a
dangerous and very bumpy ride. The key issue that you are seduced to take more risk then you
ever should. This notes are devoted the
this specific issue in context of 401K "investments", but it is important to see a bigger picture.

Those notes were written first of all for my own consumption as an exercise of
increasing my understanding of the previously unknown to me field, the field that
actually is not that different from programming, especially simulation languages
area (Excel is actually a great
simulation tool that should be used much more widely by 401K investors, but this
is a separate topic; Perl and R are also pretty suitable for creation of simple financial models).

Also I have found that people with extremely limited understanding of statistics
and primitive simulation models are often treated as geniuses in this particular
area ;-). I have a PhD in applied mathematics, so I decided that at least on those pages I probably
can compete with them :-).

Gradually it became clear to me that financial markets under neoliberalism are very inefficient and extremely exploitive and that financial
companies. They are skillfully deploying hype and deception, playing upon greed and
desperation on million of people, luring them to gamble with their meager incomes and pensions in
Wall Street Grand Casino. Advice of controlled by financial oligarchy press should be taken skeptically and with extreme caution.
One need to ask the question who is paying the piper. Typically their advice should at best be considered like double agent intelligence and
typically is close to the covert attempt to defraud 401K lemmings. It you viewed
"masters of the universe" on TV, it looks like for them the rest of society is simply
sheep to be sheared, and if they don't cooperate and behave in a properly subordinate
way, they must be punished. This attitude is constantly on parade on CNBC . In this
sense "Occupy Wall Street" movement should really be called "Liberate America" because
it is financial industry that behaves in the USA as occupiers behave in a conquered
country. One should see PBSThe Retirement
Gamblemore fully understand what I am talking about (it's 52
min). A short six minute summary can be found at

The US government ties their second-largest set of tax breaks to "forced investments" in 401K.
Which usually have a very limited selection of mutual funds. With some 401K populated with
"predatory" offirings. The USA government is doing this not because it wants
401K lemmings to prospered, but because this generates huge revenue for FIRE industry,
which contrls the goverment (and any US adult with university education probably has very little
illusions about
whom US government really represents).

Now they can skim this huge money flow at multiple places Also regular inflows tend to drive asset
prices higher, which create another nice opportunity for speculation for Wall Street.
And the current economic system is all about speculation, that's why it is often
called Casino Capitalism.
You can read a short, but instructive overview of casino capitalism in
History of Casino
Capitalism.

The way 401K structured
reminds me a classic financial racket. Company brass negotiates with some greedy financial
company some discounts for the main activities providing them in return the opportunity
to manage 401K plan. Typically this is quid pro quo deal so funds available
might have really ridiculous fees. In case of Merrill Lynch
and Wal-Mart fleecing Wal-Mart lemmings is achieved by constructing some special
financial instruments, which are not even regular mutual funds (something to say
about the level of greed of Walton's family). Selection is typically very limited:
one or two bond funds and half a dozen or a dozen stock funds, so there is an implicit
pressure to put all your money into stocks. Which in many case are risky offerings
(emerging market growth and like). What I would applaud is
seeing administrators of the 401k plans taken in handcuffs to jail for reneging
on their fiduciary responsibility to provide risk adjusted return at a competitive
price.

But those laments brings us nowhere. Like Margaret Thatcher used to say about
neoliberalism "There Is No Alternative" (TINA). We need to play in this game which
was forced upon us from the best we can. For that we a plan of actions, a strategy to minimize risks
and clear understanding that the game stacked
against us. No question about it.

The first step in such plan 401K "investors" (who really are donors or pray for
Wall Street sharks)
should be "deprogramming" from Wall Street propaganda. One can't go further without
a healthy doze of distrust to all those wealth management and fund manager schemes.
If this page can provide some help in just deprogramming, then my efforts to write
and publish it were not useless. In any case, remember that:

401K
have turned out to be a as close to a disaster as one can get for many brainwashed
participants, who gambles with their money (and then sell them in panic making paper losses
real).

It is definitely
a bonanza, a huge gift from the government to Wall Street (or more correctly
a gift to themselves by Wall Street, which captured the government via
Quiet coup).

This notes are based on facts that I collected over the last fifteen
years. The key assumption that I think we should adopt the understanding that that 401K is not just
a mechanism for saving for retirement it is simultaneously
a hidden tax on your retirement savings imposed by Wall Street and its agents in
government. That means that your real (after tax, after inflation) return typically
is zero or negative. Yes they're periods like (2009-2015) when this is
not true and stock market grows like there is no tomorrow (actually S&P500 reached 1640 in 2000 so
recent run to 2000 is just 400 points in 15 years). But over any 20 years period it is very
true, especially if you act without full understanding of consequences (and full understanding
requires studying the subject). In any case one of the best strategy is to try to minimize this tax.

At the same time the you can't just
bail out as there is no any better alternative to save for retirement with deferred
taxes return. So the word "TINA" -- "There Is No Alternative"
used about neoliberalism is applicable here as 401K plans are a part of neoliberal
transformation of the US society. We just need to be aware that if we are not careful
a large part of returns (and may be even a part of principal) might be taken by
fund managers and Wall Street via adverse selection of funds, various fees and market
volatility (selling in panic when funds dropped during yet another financial crisis
(and they come pretty regularly) is a sure way to minimize your 401K returns).

While eight times of your annual salary in most cases will provide you a
pretty comfortable retirement, there is a minor problem: for regular folk this goal is
unachievable.

As they privatized pensions offloading most of the financial risks on the individual,
with the current level of inflation
Fidelity recommends to save at least 8 times your annual salary before retirement.
See
Fidelity calculations. If inflation goes up all bets are off (that's why
TIPs are an important component of sound 401K portfolio; but as they are tax deductible
they should be accumulated outside 401K, with similar tax advantages as within
401K, albeit without the benefit of investing before tax money).
While eight times of your annual salary in most cases will provide you a pretty
comfortable retirement, there is a minor problem: for regular folk this goal is
unachievable due to several factors:

Employment stopped to be continues for most of the people.
You need to expect gaps and have funds to survive them. That negatively
affects your 401K (although you can use it without penalty and in this role
it is an important instrument ).

Financial deregulation was powerful enabler of predatory behavior
by Wall Street towards 401K investors. So the tax they extract from you
by bringing the country in yet another financial crisis after 2008 is an unknown
factor.

Rate of inflation and stability of the dollar are two important, but
unpredictable factors. So far both were very favorable to retirees,
but that can abruptly change due to the size of the US external debt.

Price of the oil during your retirement is the major factor in cost of
living and is another less predictable factor. A reasonable assumption here
is that is might well be higher, but as for the question "How much higher?"
your mileage may vary...

All this factors mean that your financial situation in retirement is much more
unpredictable that people think due to existance of several important factors which completely beyond your control.
The importance of those factors raise with the length of the period you need to
provide retirement income from your own funds. In other words this neoliberal
transformation of US pension system is giant screw up of the middle class.

But for baby boomers (whose extremely lucky folks ;-) there is a possibility
to beat the system. One obvious way is to adopt a modest lifestyle in retirement. You can also can take
your SS pension at 70 years, spending most of your 401K before that. That decreases the inflation risk
(SS percion is indexed to inflation, at least parcially, although there are efforts to change that) . In this case Uncle Sam adds
approximately 44% to what your pension would be at 66 (for example $2000 at 66 became $3000 at 70).

For programmers and other IT folks that probably means that if you are over 50,
you better prepare a more or less precise estimate of you living costs using Excel and cut you
current expenses.
If your monthly cost of living is at or below $4.5K per month spending most of your 401K to get max
SS pension at 70 is an opportunity you should consider.

Minimization of inflation
risk alone is worth trying this opportunity. If we assume that more
or less comfortable retirement for a married couple is possible in most of US states (with
possible exception of California, NY, New Jersey and like)
for $4500 a month (see calculation at Insufficient Retirement
Funds Problem), you need approximately $54K for each year before 70.

Item

Monthly

Annual

Total expenses

4505

54060

Rent

1500

18000

Food

800

9600

Travel

666

8000

Suppl Medical Insurance

400

4800

Car amortization (two cars)

208

2500

Car insurance (two cars)

150

1800

TV

120

1440

Gas/transportation

120

1440

Heating/air conditioning

100

1200

Extra expenses

100

1200

Drugs and out-of-pocket med

100

1200

Electricity

60

720

Presents to relatives

50

600

Cloth, computer, furniture, etc

50

600

Internet

40

480

Cell phone

40

480

So from 65 to 70 (the easiest period to predict) you will need around $300K (or
$200K in husband account, and $100K in wife 401K account for a couple). Let's
multiple this figure by 1.5 to take into account possible adverse events (like another
financial crisis our friends from Wall Street can unleash on the country) and you
get raw estimate $450K. That figure can serve as a very imprecise guide for constructing
your own Excel spreadsheet with year to year expenses from your planned retirement
date (which can be forced on you before you reach 65 or 66) to 70.

But at least time horizon for this planning is limited to less then a decade
which limits variability of many factors. Generally people say that financial plans
that predict something for more then five years are useless, and there is great
truth in this statement ;-). The hidden beauty of this $4.5K per month living
expenses estimate is that assuming that you will get $3K SS pension monthly
and your spouse will get one half you can preserve the same lifestyle on just Social
Security pension with minimal own funds. That also greatly diminish the possibility
of losing substantial share of your 401K holdings due to yet another financial crisis,
as you no longer care much for returns as you will spend your own funds in a relatively
short period. And due to this can afford to keep them in short term bonds or other
relatively stable in case of adverse events funds. If course having your own extra
funds after your 70 birthday are better, in the same way as it is much better to
be rich and healthy, then sick and poor ;-). But you can do well even if you
spend your 401K at the age 70 to the last penny.

It is important to understand that this is one of the few possibility to limit
the level of offloading all risks to individual inherent in 401K plans. And
"great fleecing" of 401K "investors" are not limited to two latest financial
crisis (such as 2000-2002 and 2008-2009). Actually the tendency to fleece middle
class off its retirement saving can be traced the to the late 80th and
Savings and loan
crisis (the law that created 401K plans went into effect on January 1981).
It is connected with the rise of
Neoliberalism which
without going into great detail meant redistribution of country wealth in favor
of the top 1% of population. And related squeezing of middle class which lost
its comfortable post war position due to insatiable greed of financial oligarchy,
automation, outsourcing and other factors.

The problem of "great fleecing" in case financial crash

But let's return to the problem of periodic financial crisis. If you think that
those two "great fleecing" of 401K investors, two crashes in 2000 and 2008 were the last, think again. It
looks more like a systemic problem with neoliberal economy then accidents.
Social system with wealth greatly concentrated at the top is just less stable. And the next
crash can occure in the most unopportune monent for you when you will feel that you need to take
losses. That's the problem which is especially acute if you are over 50.

Those "great fleecing" are supplemented by adverse actions of financial intermediaries.
As implemented 401K is a private tax of FIRE sector on your retirement savings and
should be viewed as such: they do not care about the fact that you need to support
your lifestyle in retirement, but they will force you to support plush lifestyle
of financial sharks no matter what you try to do with your investments. Some financial
intermediaries are better (Vanguard) some are worse (Fidelity), some are horrible
(Merrill Lynch), but they are all representatives of the same specie.

That means that the right strategy of 401K investment might be not an attempt
to maximize your profits but taking outsize risks, but to minimize risk of
not getting the required $300K in 401K account at the age of 65. So
it is unwise to abandon this avenue of savings even if the manager of your financial
plan is Merrill Lynch, but extreme risk-avoidance might be appropriate.

This
is a casino, despite all efforts of Wall-street financed media such as Money, Smart
Money, WSJ, Financial Times, etc to convince you otherwise. And house always wins.
Please remember that if you lose 30% of your contribution in 10 years after inflation
(which is pretty typical result of several
common 401K investment strategies
such as "Stocks for
the Long Run" Strategy (Naive Siegelism)), then it does not matter much
whether it was before tax investment on not. In this case you are not breaking
even despite tax breaks. Of course everyone of us think that we are more clever
then others, and those adverse scenarios are just for fools. But as Bernard Shaw aptly noted
the most sure way to be deceived is to think that you are clever then others (he
probably forgot to clarify "deceived by Financial industry.")

In case you think that three statement below are an exaggeration you probably
should stop reading at this point. Here are those three statements:

Due to offloading retirement risk to the individual, for most of 401K
investors positive after inflation return is an unrealistic dream. First
of all this is a side effect of feeding financial sharks in the process. All
this games that systematic investing of 401K lemmings made possible (and 401K
plans are the real reason of spectacular run of stocks since 1981), are played
by Wall Street against you. Secondly because the economic landscape
is complex and unpredictable you will always make some bad decisions in investing
your 401K money. As you can't predict future even supposedly safe investments
can turn bad. Stock market is a casino and it does not respect you desire comfortably
retire. In a way it moves to produce maximum harm on 401K lemmings.
Also the whole idea of permanent growth of stocks is false as there are limit
of growth of the economy, especially in case of high oil prices (so called "secular stagnation"). And
Herbert Stein noted "If something cannot go on forever, it will stop".

Government via inflation imposes another additional tax on your
401K savings by confiscating lion share of gains. Both bond and stock returns
have two components: the first is compensation for inflation. The second is
so called real return. Inflation is unpredictable factor even for the
period of three years, to say nothing about period of 20-30 years. Typically
inflation rises suddenly as confidence in the currency evaporate and chickens
comes home to roost. That's why it is prudent to use investments that
at least partially compensate you for inflation such as TIPS bonds and as well
as junk bonds.

In many cases explicit and hidden fees are such that not
only all your gains (if there are any after inflation), but also a part of your
principal are simply confiscated (in a form of 401K plan fees, mutual fund
fees, hidden fees, stock market working against retail investor, etc ). For
example, if a bond fund returns 4% and impose fees of 1%, while inflation is
2%, that means that this fund takes 50% of your annual gains for the privilege
of holding your money. If you invested when, for example long term bond
fund was 25% above its "cost" and its price dropped 30% (the scenario
that was common in 2013) in case of long term bonds (for example 30 years bonds)
you lose part of your principal for foreseeable future.

Again, if you do not believe that those three statements represent realistic
assessment of the current situation for 401K investors you probably do not need
to read any further. All subsequent text will look for you like an unwarranted
attempt to paint a much darker picture on reality, that it really is.

Facts on the ground suggest that for considerable part of 401K investors
who represent so called "all stock" 401K investors returns for periods of last 10
years and last 15 years are negative after inflation (Note: that' certainly
was true for investors in S&P500 as of November 14, 2012, but it is not true as
of September 2013 ).

The key assumption here is that a typical 401K plan with all its
tricks and warts
(in combination with Wall Street brainwashing) constitute an tax on savings
made by 401K investors. Other things equal most allocations will be worse
that the direct investment of same amount of money in inflation protected
government bonds like TIPs) and even larger share will be worse then 100-your_age strategy with stocks represented
by either 401K or by high yield bonds (which for all practical purposes
behave exactly like stocks but provide better dividends). And paradoxically
this result does not depend much on the level of education of a particular
401K investor -- stock market behavior is a very slow stochastic process
that most people can't comprehend because of limit of their life span (but
thinking about current levels of stocks in terms of 200 days and 1000 days
averages, as well as
Shiller
cyclically adjusted 10-year price/earnings ratio might slightly help).

While I wrote those notes mostly after dot-com bubble crush, in 2008-2010 we
have had another shakeout of 401K investors, bigger and more dangerous then
previous. So suddenly my notes, which were rarely assessed in 2004-2007, suddenly
became quite popular again ;-). And responding to this new popularity I slightly
updated them. Still please understand that the core material is old and was written
after dot-com bubble.

Of course, the bleeding caused by the 2008 financial crisis and collapse
of Bear Sterns and Lehman will eventually staunch, but the issue of inherent instability
of financial sector and its natural tendency to engage
in predatory to the society behavior remains.
The
resulting loss of economic stability will reverberate to the end of baby boomers
lives. As Griff Rhys Jones aptly noted in Times (It
isn't very funny to lose your pot of money):

Like Winnie-the-Pooh, I'm left scratching my head. How could a ‘safe'
deposit account evaporate, leaving the bankers unscathed?

This will cheer you up. I lost a big sum of money recently. It evaporated
with Lehman Brothers. As it happens, I was hardly aware that I had anything
deposited with this distinguished banking house (or hopelessly greedy incompetents,
depending on the way you choose to look at them) until I telephoned the manager
of my account at a hedge fund.

Now let's go back. I am a financial innocent. I distrust all wealth management and fund manager types. I
distrust them from a deep, puritanical atavistic well. But I happen to have
savings and pension funds to consider. We drones
make our money by luck and talent, by inventing things or creating things, and
not by accountancy, so we are doomed to be the patsies of the financial sector.
We are the wildebeests by the waterhole. We are the ones who have to die to
feed these ghastly, lazy, incompetent predators.

The two key problems for 401K accounts generally lack of attention to
diversification (and here I means not diversification between different stock finds
which is a fake diversification as in crisis all correlations go to one) and
real returns and taking excessive risks.
Nest Eggs Seem
to Lack Attention and Diversity

Two thoughts - first, I wonder whether Vanguard took into account
that IRAs tend to feature smaller annual contributions, which makes
it hard to amass enough capital to diversify across multiple funds.

But the asset allocation is certainly troubling. It looks like the
mirror image of what happened in the mid-1990s, when individuals were
being told to diversify into equities (an
argument that leaned heavily on Jeremy Siegel) and out
of stable value/money market funds. Looks like that argument worked
perhaps too well.

It's not easy and somewhat counterintuitive to understand that all your 401K
money are just chips in the game for the financial industry traders (aka speculators).
And stock market speculators, "these ghastly, lazy,
incompetent predators" consider 401K investors to be a legitimate
target for any dirty trick they can invent. A lot of them, probably majority,
have no conscience whatsoever; in a way they are quintessential group of highly
educated psychopaths.

And that "these
ghastly, lazy, incompetent predators" view you as a legitimate
target for any dirty trick they can invent. A lot of them, probably majority,
have no conscience whatsoever; in a way they are quintessential group of
highly educated psychopaths.

This consideration makes unmanaged funds and ETFs definitely preferable from
yet another point of view ;-). But this alone can't compensate for the lack of attention
to your investments, which most 401K investors consistently demonstrate. Some boast
that they never open mailed returns.

I would like to stress it again that any 401K investor who does not use his/her
own spreadsheet to see his/her multiyear balance of contributions vs. balance of
savings and change his/her allocation according to some sound strategy and instead
moves money based on market hype doomed to be a victim of Wall Street predators.
Those who refuse to take investing risks seriously (and to hedge against stock market
risks by keeping a substantial portion of 401K savings in TIPs, stable value funds,
etc) and still live in the la-la land of "stocks for a long run"
might eventually lose a part of their 401K principal. Selling in panic
at the bottom of one of recent financial crisis's (or close to it) was one sure
way to accomplish this trick. In this respect 2002-2003 and 2008-2009 might just
be a harbingers of the radical change of the rules of the game and the irreversible
switch to the active process of decimation of middle class in the USA.

There is no more trust in the fairness of the system. And this "loss of trust"
is shared by many top economists. So this highly skeptical attitude is not limited
to the author. As
Robert Reich noted:

Typical Americans are hurting very badly right now. They resent people who
appear to be living high off a system dominated by insiders with the right
connections. They've become increasingly suspicious of the conflicts of
interest, cozy relationships, and payoffs that seem to pervade not only official
Washington but our biggest banks and corporations. In short, many Americans
who have worked hard, saved as much as they can, bought a home, obeyed the law,
and paid every cent of taxes that were due are beginning to feel like chumps.

Their jobs are disappearing, their savings are disappearing, their homes
are worth far less than they thought they were, their tax bills are as high
as ever if not higher -- but people at the top seem to be living far different
lives in a different universe. They're the executives and traders on Wall
Street who have lived like kings for years off a bubble of their own making
while ripping off small investors, the financial louts who are now taking hundreds
of billions of taxpayer bailout money while awarding themselves huge bonuses
and throwing lavish parties, the corporate CEOs who are earning seven figures
while laying off thousands of workers, the billionaire hedge-fund and private-equity
managers who are paying a marginal tax rate of 15 percent on what they say are
capital gains while people who earn a fraction of that are paying a higher rate,
and, not the least, the Washington insiders who have served on the Hill or in
an administration and then gone on to pocket millions as lobbyists for the same
companies they once regulated or subsidized. To
the American who's outside the power centers ... the entire system seems rotten.
...

Of course the phenomenon we are talking about is so complex that predictions
are extremely difficult and "doom and gloom" attitude (aka buy food and ammunition)
is definitely wrong. But high level of caution is not, as you was forcefully put
in casino and forced to gamble with your money. That's what 401K is about. And 401K
investors should not be sitting still and wait until last drops of their wealth
disappeared, like typically happens in casino with "marks". We need to try to fight
back and at least limit our "after inflation" losses:

"The middle class and working poor are told that what's happening to them
is the consequence of Adam Smith's 'Invisible Hand.' This is a lie. What's happening
to them is the direct consequence of corporate activism, intellectual propaganda,
the rise of a religious orthodoxy that in its hunger for government subsidies
has made an idol of power, and a string of political
decisions favoring the powerful and the privileged who bought the political
system right out from under us."

-- Bill Moyers, Keynote speech, June 3, 2004

Excerpt:

You just can't make this stuff up. You have to hear it to believe it. This
may be the first class war in history where the victims will die laughing. But
what they are doing to middle class and working Americans -- and to the workings
of American democracy -- is no laughing matter.
Go online and read the transcripts of Enron traders in the energy crisis four
years ago, discussing how they were manipulating the California power market
in telephone calls in which they gloat about ripping off "those poor grandmothers."
Read how they talk about political contributions to politicians like "Kenny
Boy" Lay's best friend George W. Bush.

... ... ..

Let's face the reality: If ripping off the public
trust; if distributing tax breaks to the wealthy at the expense of the poor;
if driving the country into deficits deliberately to starve social benefits;
if requiring states to balance their budgets on the backs of the poor; if squeezing
the wages of workers until the labor force resembles a nation of serfs -- if
this isn't class war, what is?

It's un-American. It's unpatriotic. And it's wrong.

Shell-shocked 77 million baby boomers for whom 401K in 2008 again became 301K
need to understand that any risky investments in their 401K in the age of derivatives
and TBTF with their HFT farms of supercomputers trying to steal every fraction of
penny possible are not only super-risky. they create positive feedback loops that
destabilize the system and make crashes imminent. And huge drop of stock market
can and does trigger panic selling. and if sell in this casino at the bottom
that the worst situation possible: even with zero return you still get some gains
because of matching and tax advantages, but with -5% annualized returns you get
nothing. Both stocks finds and bond funds are
very dangerous instruments now: they became just a chew gum for maniacal
Wall Street and hedge funds trading robots.

The autodafé of the 401K investors in 2008 was the final act of the huge wealth
transfer from middle class to financial oligarchs. Probably the biggest in the USA
history. Robber barons of the beginning of 20th century were children in comparison,
At least in their ability to rob the middle class in comparison with current
generation of oligarchs... Add to this additional currency risks which are
mostly external and now depends on behavior of China and petro-states. .

Academic studies suggest that we are good at some kinds of risk assessments and
very bad at others. Malcolm Gladwell, the author of the book
Outliers put forward an interesting hypothesis that 10,000 hours
of study/experience as a young man/woman is a prerequisite for getting to the high
level in almost any field. Few of 401K investors can afford such amount of hours
(say 1000 hours (which means approximately 60 days a year, 16 hours a day) for 10
years). Many like the author started to educate themselves while being pretty
old...

But without at least minimal training, unfortunately, the kinds of risks that
we face in 401K investments are precisely those we are most likely to overlook.
They are unobvious, but systemic long term risks:
like in casino the more you play the more you lose. But unlike casino where is the
morning you are already empty pocketed, this financial bleeding take a long time,
several decades. Investing in 401K a slow, very slow process with consequences detached
from decisions by several years, if not decades. And without keeping your own records
and without comparing the amount you invested and amount you have after inflation
(in dollars of the first year of investment or some other "fixed year" dollars)
using Excel you will never be able to discover that.

Absolute sum can be even or slightly higher, but if you count inflation you lost
money. If you counting inflation then in "constant dollars" S&P500 was barely beating
inflation from 1994 to 2013. The value of S&P should be multiplied by 0.62, to get
the reading in 1993 dollars. That means that most of S&P500 gains are due to inflation:

Year

Inflation
%

Cost of $1 item in 1993 dollars

Dollar value in 1993 dollars

1993

3

1

1

1994

2.6

1.026

0.974659

1995

2.8

1.054728

0.948112

1996

3

1.08637

0.920497

1997

2.3

1.111356

0.899801

1998

1.6

1.129138

0.885631

1999

2.2

1.153979

0.866567

2000

3.4

1.193214

0.838072

2001

2.8

1.226624

0.815245

2002

1.6

1.24625

0.802407

2003

2.3

1.274914

0.784367

2004

2.7

1.309337

0.763745

2005

3.4

1.353854

0.738632

2006

3.2

1.397178

0.715729

2007

2.8

1.436299

0.696234

2008

3.8

1.490878

0.670746

2009

-0.4

1.484914

0.673439

2010

1.6

1.508673

0.662834

2011

3.2

1.556951

0.642281

2012

2.1

1.589647

0.629071

That simply means that if we assume that the level of S&P in 1993 was,
say 1000, then the level of S&P in 2012 equal to 1600 means zero after inflation
returns (outside dividends). The amazing rise of S&P500 to 1650 in May
2013 might be not connected to the recovery. It might well be a demonstration of
asset price inflation. After all stocks can be considered to be private money of
public corporations (like Fed they can print them or buy them back) and stock
price -- an exchange rate of this currency to dollar. As such this rise on the
background of stagnant economy and flat GDP (only games with inflation
calculation make it positive) it is more of a harbinger of a new financial
crisis, then sign of a recovery. See
Inflation, Deflation and Confiscation

Until 2013 with it mind boggling jump of S&P500 typical 401K to
almost 1700 (and simultaneous 10% drop of most bond funds in June due to 1% rise
of 10 year Treasury bonds interest) an investor with all
money in S&P500 lost approximately 10-20% in a three consecutive decades
(1980-1990, 1990-2000 and 2000-2010) in comparison with diversified
bond fond such as PIMCO Total Return. so much for "stock for a long
run" (akaNaive Siegelism)
. But this devastating result was not visible on raw figures. That's why I would actually prohibit to invest
in anything, but TIPS or government bonds for people who can't use Excel on at least
level of Microsoft
Excel 2010 Step by Stepand/or lazy/disinterested to calculate
real returns of parts of 401K portfolio.

And those who do not have this level of Excel skills
should acquire them by taking a course in community college or other educational
institution. This is much better investment that paying to financial professional
to oversee your funds. It5 is also a better investment of time then reading
Money, Smart Money or Kiplinger. Only when you can see your last ten year progress
in "constant dollars" in a spreadsheet we can talk about some level of understanding
of investment basics. And that process alone will give you valuable insights, insights
that statistics provided by mutual funds usually tries to hide. One of such
insights is that financial intermediaries is not just managing your money, they
are managing them to their benefit and 1% per year fees that you pay for many stock
funds over typical ten year period often constitute 50% or more of after inflation
return. At this point you might start to understand that 2% after inflation that
TIPs pay is actually not a bad deal.

Investing in 401K a slow, very slow process with consequences
detached from decisions by many years, with results evident often only in
a decade or so. This fact alone make most people unable to follow it.
That's why 401K planning should involve Excel simulations

Moreover economic losses for families are often like system failures in engineering
-- they cascade from seemingly small events into major crises as drop in 401K can
correlate with the drop in house value and the loss of job of one of family members.
Generally in financial crisis seemingly uncorrelated assets are suddenly highly
correlated and fund allocation recommendations that are fed to us by financial
planners and grace pages of Vanguard, Fidelity and other behemoths of 401K business
became hopelessly detached from reality.

Due to this inability to weight the long term risks, most 401K investors
systematically underestimate the risks involved in 401K investing and the predatory
nature of financial intermediaries. Risk of 401K investments is really high due
to:

Uncertain view of inflation during your retirement (say 2015-2040). Will
it remain benign as in period from 1992-2012? Or there will be a period
with high inflation similar to 1970s stagflation.

Uncertain view on cost of energy during 2015-2040 (will gas remain $4 per
gallon or will shoot to $12 per gallon)

Uncertain view of ability of the US government to serve the existing (huge)
debt.

Effects of mass baby boomer retirement on stock and bond markets.

The simple truth is that 401K investors need to fight not for the return on their
capital, but for the return of their capital. And despite being simple is very difficult
to understand. We are too brainwashed to comprehend this. And many just now are
thinking "what a jerk!" or "why I am reading this crap?". That's why most
401K "investors" realistically should never be considered to be investors, but donors
as they pay "Wall Street Tax" on their savings higher then their meager returns.
Of course that's somewhat compensated by the fact that 401K contributions are free
from the federal and local taxes. But in essence one tax is replaced by another
and if you are not careful the second tax can be bigger.

401k investors systematically
underestimate risks involved and as a
result on average have negatives returns after inflation for the last 10
years with approximately 27% drop in 2008. Those payment of Wall street
Tax should better be stopped. I guess you cannot make money on Wall
Street advising 401K investors hold cash or treasuries.

It's still not too late to understand that the road ahead for "stock for a long
run" crowd of baby boomers, brainwashed 401k investors who used static allocation
strategy and cost averaging (which brokerages like Fidelity and Vanguard, to say
nothing about despicable 401K sharks like Merrill Lynch and Putnam, love so much,
as it guarantees their profits) is very dangerous and fraught with risks that will
be impossible for anyone to ignore or avoid.

Equities markets stopped being about investing in companies, based on their
earning potential, a few decades ago. Now it is
about professional gamblers fleecing suckers.

Or using words of Naked capitalism creator Yves Smith "Big financial firms
increasingly inclined to prey on their customers and, ultimately, on societies in
which they lived." (Econned,
p.3). It is difficult but necessary to understand that the industry has become
predatory and that they are legitimately should be classified as sharks.

Equities markets stopped being about investing in companies, based
on their earning potential, a few decades ago. Now it is about professional gamblers fleecing
suckers.

Stiglitz believes that markets lie at the heart of every successful economy,
but do not work well without government regulation. In "Freefall" he explains
how flawed perspectives and incentives lead to the 'Great Recession' of 2008,
and brought mistakes that will prolong the downturn.

Between 1996-2006, Americans used over $2 trillion in home equity (HELOC) to
pay for home improvements, cars, medical bills, etc., largely because real income
had been stagnant since the early 1990s. Economic recovery requires that we
repay the remainder of these amounts, overcome stock market losses (10% between
2000-2009), the loss of some 10 million jobs, and reductions in credit card
balances, and find an equivalent amount to the former home-equity sourced financing
($975 billion in 2006 alone - about 7% of GDP) to finance another consumer-driven
GDP upturn - without the prior boom in housing and commercial building. Stiglitz
also points out that the Great Depression coincided with the decline of U.S.
agriculture (crop prices were falling before the 1929 crash), and economic growth
resumed only after the New Deal and WWII. Similarly, today's recovery from the
Great Recession is also hampered by the concomitant shift from manufacturing
to services, continued automation and globalization, taxes that have become
less progressive (shifting money from those who would spend to those who haven't),
and new accounting regulations that discourage mortgage renegotiation.

Stiglitz is particularly critical of the U.S. finance industry - its size (41%
of corporate profits in 2007), avarice (maximizing revenues through repeated
high fees generated by over-eager and over-sold homeowners needing to refinance
adjustable-rate mortgages that repeatedly reset), and 'sophisticated ignorance'
(using complex computer models to evaluate risk that failed to account for high
correlation within and between housing markets; 'eliminating risk' through buying
credit default swaps from AIG -- blind to the likelihood AIG could not make good
in a housing downturn), and excessive risk (banks leveraged up to 40:1 with
increasingly risky mortgage assets - 'liar's loans,' 2nd mortgages, ARMs, no-down-payments;
taking advantage of the 'too-big-to-fail' and 'Greenspan/Bernanke put' phenomena).
Much of this behavior was driven by lopsided personal financial incentives (bonuses)
- if bankers win, they walk off with the proceeds, and if they lose, taxpayers
pick up the tab. However, to be fair, any firm that failed to take advantage
of every opportunity to boost its earnings and stock price faced the threat
of a hostile takeover.

Even worse, recent developments signify changes to a new, far more risky environment
for 401K investors. Offloading of Wall street financial losses on the US taxpayers
will have consequences. Dollar is still standing after all events of 2008
but for how long is a tricky bet.

We need to understand that structure of investments (selection of funds available)
in most 401K plans is designed to fed Wall Street sharks. Classic example here
is Wall Mart 401K plan which has the worst manager of 401K plans imaginable
-- Merrill Lynch (which was saved from bankruptcy by government by pushing it into
Bank of America arms). This is another reason why instead of trying to maximize
returns, 401K investors should concentrate on preservation
of the capital.

Even preservation in absolute number (with inflation as losses taken) might be
considered an achievement. Only those who are flexible, open-minded, resilient,
and are able systematically use Excel spreadsheets to understand consequences of
their allocation decisions will be able to do better then that. And if your 401K
manager is Merrill Lynch you can probably forget about beating the inflation.

The regulatory destruction of the USA's during conversion of the country to
neoliberalism model
started under Reagan meant redistribution of wealth toward the top 1%.

And there is nothing accidental in the fact that once thriving "defined benefits"
pension system was gradually dismantled first by the introduction of 401K plans
in 1978 as a supplementation investment vehicle and gradually in cuckoo eggs manner
pushed traditional ("defined benefits") pensions out of the nest. The only exception
were government employees (0205fact.a).

1978. The Revenue Act of 1978 included a provision that became Internal Revenue
Code (IRC) Sec. 401(k) (for which the plans are named), under which
employees are not taxed on the portion of income
they elect to receive as deferred compensation rather than as direct cash payments.
The Revenue Act of 1978 added permanent provisions to the IRC, sanctioning the
use of salary reductions as a source of plan contributions.
The law went into effect on Jan. 1, 1980.
Regulations were issued in November of 1981.

Once the envy of the world, the USA privately provided defined benefit pension
system now is largely destroyed. For mid-income working families 401K plan was and
always will be an inferior replacement for pensions, unless you contribute over
20% (with matching) to your 401K. So in a way that was stealth 20% reduction of
the salary. As additional risks were offloaded the figure is probably
even higher. Among offloaded risks are inflation risk and market risks. Offloading
those two risks to individuals benefited mostly financial industry,

And even with 15% contribution it means that at least twice as much
risk is taken by the individual instead of the corporation.

When we think about the middle class, we tend to think of Americans whose lives
are decent but not luxurious: they have houses, can buy a new car, have health insurance
for all members of the family, and can finance university education for kids. With
the destruction of pensions the latter became more problematic. Add to this high
unemployment, especially in 50 to 60 age group. baby boomers are exactly the
fist generation of people who were when they were in this 30th were switched to
401K from traditional plans (the law was enacted in 1981 -- 32 years from now)

Now in addition to paying the cost of kid's college tuition (which experienced
exorbitant growth as another path of wealth redistribution toward top 1%)
they need to collect money for their own retirement. The Section 401(k) of the tax
code was enacted in 1981 is vastly inferior for everybody but the top earners
(let's say those who earn above $200K per family or above $100K per individual).
It also has several side effects (as in "road to hell is paved with good intentions"
) and one of them was rapid impoverishment of the lower middle class:

It launched huge growth of mutual fund industry which before
that was a small part of financial markets. It is by-and-large parasitic industry.
Much of its activity can be provided by state at much lower cost (limiting individuals
with 401K to government bonds would be not a bad idea).

It also revitalized the stock market and implicitly was one of the key
factors that lead to huge growth of financial sector. With the evaporation
of pension plans the American public has actually been forced into the
stock market (or more correctly into stock mutual funds) because
most 401K plans are heavily and openly biased toward
stocks. That initialed huge transfer of wealth to Wall Street firms. It also
allow Wall Street to play with all those stocks (401K plans hold lion share
of all stocks in he USA). Hacking stock market with HFT and derivates became
favorite pasture of those parasites and they invented pretty ingenious methods
of such hacking.

It stimulated predatory behavior and contributed to creation of dot-com
bubble, and then housing bubble. 401K investors are natural targets
for "pump and dump" Ponzi schemes. Tech stocks purchases by 401K participants
due to the numerical strength of baby boomers became important factor that droved
tech stock prices up and provide cover for speculators ("401K investors put"
similar to government intervention in stock markets directed in saving key Wall
Street players pioneered by Greenspan and Rubin and know under the name of
"Greenspan's put").

It allows directly quid pro quo games with selection
of funds and 401K managers. Many companies offer employees inferior
funds with high fees and bad management. Classic example here is Wall Mart.
Additional fleecing tricks like folding fund and moving funds to other fund
with payment for losses from the pockets of investors are also used (Blackrock
is famous for using this strategy).

Actually very few programmers and other middle-class professionals are
individual stock purchasers operating through brokers; most are dependent upon mutual
fund managers navigating market or on index funds. In 1990th mutual funds became
huge industry and saturated mass media with expectations of quick and easy
profits. Although they were not the primary factor, they were constructive in creating
and maintaining dot-com boom. The need to slow down and prepare for contracting
credit after the biggest in the century Credit Boom was lost in the fast-paced world
of momentum trading. As a result the first 401K accounts crash badly affected most
401K investors. Few lost less then 10%. Losses such as 30-40% were pretty
common. Generally they did not recover probably until 2007 just in time for the
second crash. The amount of money transferred
to Wall Street from 401K investors can be conservatively estimated as 20-30% of
all 401K contributions. That's a huge tax.

It continues to fascinate me that many 401K investors with pretty high level
of education including myself are entirely willing to base their financial
security on concepts that looks quite unconvincing even after a cursory look at
historical data. In other work to junk science. Even a simple
Excel imitations model runs on historical
data prove that the portfolio theory as preached by Wall Street is in a reality
a modern snake oil. For example, since Jan 1, 1996 stable value funds
(and diversified bond funds like PIMCO Total Return) outperform 100% S&P 500 investment
by at least 17% (as of April 14, 2010 with S&P at 1200). That's almost 15 years
span and that suggests that stocks "in a long run" might be unable to outperform
even the most conservative investment in bonds. The situation changed
only in 2013 when S&P 500 due to Bernanke "easing" rocket to almost 1700 level.

As a computer professionals we work long hours trying to acquire hard to get
skills. We try to get certifications to motivate ourselves to study consistently.
But when it comes to the decision related to those hard eared money we display
amazing stupidity and are ready to believe into almost any nonsense propagated by
mainstream press. It continues to fascinate me that many computer science
professionals who are better then others are equipped to do simple Excel-based simulations
and test hypothesis on historical data are willing to base their financial security
on "ad hoc" concepts from some guru, the advice which can be disproved with even
a cursory look at historical data with Excel in hand. This list until recently included
myself.

It continues to fascinate me that many
401K investors including, until recently, myself are willing to base their
financial security on "ad hoc" concepts from some guru that can be disproved
with even a cursory look at historical data with Excel in hand.

We need to understand that suddenly 401K became "the pension plan", the replacement
of traditional pension plans as they disappeared into thin air. And it requires
the respect and amount of leg work that is proper for the pension plan. That means
a lot... The big lesson to be learned from 2001-2003
is the importance of having a properly constructed investment
plan and sticking to it -- not being distracted by short-term "noise":

The first step is to understand that using 401K as a substitute
for pension with the typical meager employer matching (say 4.5%) requires higher
level of individual contributions (probably 15% is the minimum, if we assume
20 years contribution period) to match the pension plan. This additional
12% "tax" makes life of workers more
risky and more frugal (bit at the same time provide "safety
net" (you can take out money from 401K without penalty if you are unemployed)
in case of long term unemployment, which now is a real possibility for many
of us):

Traditional pension plans offered better returns and more personal security
than you'll ever get from your investments. In a typical 401K plan,
you need sum of your own and company annual
company contribution of approximately 15% of salary for at least 20 years
to provide for 3/4 of the salary -- typical top pension for "long timers"
in the traditional pension plan.

Generally you can't compensate lower contribution with taking higher
risk as additional dividends from risky investments are appropriated by
company executives and Wall Street firms and are reflected in their bonuses.
When your contributions are just equal to the contributions of the company
and the company pays 4.5-6.5%, most probably you'd will wind up with a lower
retirement income. That income can became much lower if you make some risky
bets that did not play off.

If 401K is such an important for our retirement thing that it should
be treated as a very conservative investment.Don't take excessive
risk and don't put all your eggs in one basket. That means two
things:

Avoid "totalitarian" or close to them portfolios: 100%
stock, 100% bonds or 100% cash portfolios are more risky then balanced between
those three classes of assets. This is a very simple idea, but it has profound
meaning, My limited simulations suggest that the ration in which your assets
are divided between different classes (stocks vs. bonds/cash) might actually
be more important than the individual stocks and bonds funds you hold.
I actually respect "cash investors" despite the fact that I am skeptical
about their allocation choice. Unless inflation strikes, they can
predict their future income with high precision. At the same time
chasing returns many 401K investors had thrown any caution into the wind.
Cash returns are so low -- courtesy of Greenspan's ultra easy monetary policies
that turn the 401K investors 'returns mad'. But that does not mean
that those who are taking higher risks with get higher returns as returns
are appropriated before they can get in your account. It is the risk that
you will be holding. In a way 401K plan can be considered to be a
synthetic investing instrument, a derivative in which risks are carried
by 401K investors with returns removed.

The second important idea is that as 401K selections are mostly limited
to stocks and bonds both stocks , bonds should constitute the sizable portions
of portfolio and using close to 50:50 allocation strategies such as a simple
100-your_ageformula of splitting stock
and bond assets might be one of the best 401K investment advices money can
buy. One important fact is that stocks might not provide higher return then
bonds in a long run. For example since 1996 S&P 500 lost 17% in comparison
with PIMCO Total Return bond fund (as of April 21, 2010).

Unfortunately it looks like most programmers prefer heavily loaded
(80% or more) stock portfolio. The tendency to overload 401K plans with
stocks might have been one of the contributing factors and in a perverse
way simultaneously a consequence of the first Greenspan bubble (tech
stock bubble of 1996-2000) despite the fact that a lot of professionals
(most programmers who I know) dearly paid for such an allocation.
I was one of them and that actually stimulated me to research the subject.

As a quick reality check even S&P500 might not those days provide
safe store of value as financial stocks now serve as a proxy of tech
stocks in 2001-2003 stock crash (mortgage crises and deleveraging crisis).
The reason for the strong performance of stocks over the last 10-20
years or so might replacement since the early 1980s consumer price inflation
with the asset inflation.

If some money can be saved in Roth account, the second level of strategy
should include consideration of what kind of assets to keep in in each.
You can invest in commodities here, the opportunity that is not available in
401K. The idea is that by better planning you might slightly ( this is not a
panacea) increase the amount of money after taxes that you end up with
in retirement. For example one
2004
paper on asset location suggested the max difference can be as high as 15%.
While this is probably an overstatement even 5% is a huge difference.

You need to understand that another even more dangerous part of this
situation is thatgovernment offloaded inflation
risks on the shoulders of individual investor.As Alan Greenspan noted well
before his famous monetary base expansion efforts "In the absence of the
gold standard, there is no way to protect savings from confiscation through
inflation. There is no safe store of value."

Your investment horizon is pretty limited (for most people it is
approximately 20 years (40-60). If all you can afford is a couple of decades
of active investing that means that "stocks for a long run" idea might not work
in your situation:

Professionals, especially programmers over 55, are the most frequent
target of layoffs (chances to be laid off for people over 55 are more than
two times higher than in other age brackets). Those days to expect to survive
till 62.5 as a programmer is somewhat a stretch.

The typical period after layoff and finding new job now can last not
several month but several years (as happened with some of my friends
who lost jobs in 2002 and found jobs only in 2006) and in most case older
folks are unable to get even 80% of the previous salary on a new job.
Often they are "50% off"...

Many former programmers and IT specialists are unable to find professional
job at all and are pushed into semi-qualified labor pool.

That cuts the most intensive 401K investment period to approximately
10-20 years (45-55 in worst case and 40-60 in the best). And that
means that you better do not make costly mistakes during this period and
after as at this point you contributed maximum amount of money that you
can relay later on.

The name plankton is derived
from the
Greek word πλανκτος ("planktos"), meaning "wanderer" or "drifter".[1]
While some forms of plankton are capable of independent movement and
can swim up to several hundreds of meters vertically in a single
day (a behavior
called
diel vertical migration), their horizontal position is primarily
determined by
currents in the body of water they inhabit.
By definition, organisms classified as plankton
are unable to resist ocean currents. This is in contrast
to nekton
organisms that can swim against the ambient flow of the water environment
and control their position (e.g.
squid,
fish, and
marine mammals).

The key idea to understand that 401K is not designed to help people to fund their
pensions. It was designed as a new tax on middle class by money-center banks, mutual
and hedge funds. The rapacious removal of wealth from farmers and small communities
by large money center banks is not something new in the USA history. It happened
before.

for example this was also the case during the Gilded Age. And what was done for
the last 25 years is nothing but a blatant attempt to restore worst excesses of
Gilded Age under the cover of deregulation and using the smoke screen of neoclassical
economics. Neoliberalism
is many ways means the return to Gilded Age.

The problem here is that Wall Street proved to be extremely skillful in separating
401K investors and their money. This "rape" of 401K investors is underreported
by MSM. Moreover, if you think about the real life purposes of financial intermediaries
the purpose nothing but this centuries old trick. the role of fools here is assigned
to 401K investors. Jeff Wenniger from Harris Private Bank says an army of baby-boomers
have seen their old age plans shattered by the housing bust. Now they will have
to spend less, and save more:

"Generational destruction of a society's balance sheet down not rectify
itself in a matter of months".

In the current situation of financial instability it is probably wrong to look
at the stocks as real capital. Stock markets are examples of fictitious capital
like chips in casino (or fiat currency). They don't produce wealth themselves, but
represent a claim on income produced by something else. However, they are bought
and sold as if the former were the case. That means that gains can be made but only
speculatively.

Just ask yourself, what is the social purpose of a casino ? Stock market social
function is very close, although not identical. Now ask how casino attract
its customers. It looks like in both cases the demand is based on a huge number
of people each of which thinks he/she is above average.

This is not a new situation but just the number of 401K investors changed the
rules of the game. Losers' money were always here for taking. And Wall Street never
miss a chance to loot: retirement savings are being used to prop abusive short selling
at major investment banks and hedge funds with tacit approval of major mutual funds
that hold the 401K money. Short sellers and traders can make a killing while most
people see their retirement accounts dwindling. Unfortunately we have "CNBC lobotomized
population that doesn't question anything." 401K investors have to start questioning
more and they'd better start by scrutinizing how 401K accounts are being managed
and by informing themselves of what is really going on in financial markets. Otherwise
your funds might be lost in the largest casino of
Casino Capitalism: 401K casino.

The 401(k), as the plan is known, is literally a do-it-yourself retirement plan
completely dependent on the vagaries of the (highly manipulated) market. The
401(k) plan places the responsibility and all risks of the market entirely on the
worker. While today 401(k) is a household word, it is a relatively recent
phenomena that corresponds to the rise of Reaganomics in the USA. It was nearly
unknown 20 years ago. During the dot-com boom of the late 1990s the
401(k) was associated with the promise of easy wealth. William Wolman and Anne Colamosca,
authors of The Great 401(k) Hoax, write,

“it appeared as a device that made it easy for the average worker to participate
in the biggest boom in history. It seemed the 401(k) would be a perpetual wealth
machine for each and every member of the great American middle class.”

With the rapid rise of high-tech stocks, many workers saw their contributions
grow exponentially. And most of them were severely burned by subsequent bust. Then
slow recovery happened in 2003-2007. Now we see a new bust that evaporated most
gains and put more then a third of 401K owners who invested in stocks into situation
when they lost 60-65% in comparison with people who from 1996 invested in stable
value fund. But in reality this was a Ponzi scheme with tricks played by "too
big too fail" banks over unsuspecting public. Some of those tricks were pretty dirty
and directly affect investors who invest via mutual funds (Memories
of Citi's Eurobond Price Manipulation):

I recall reading at the time how the Citi traders
were incredulous at being outed by the regulators, because that is how they
would do things in the States, running the stops and using outsized positions
to perform short term price manipulation. In the states 'price
management' has become quite notorious around key market events, such as option
expiration. It is so prevalent that it has its own momentum among traders. The
only time that it is remarked by the exchanges in the states, however, is when
other prop trading desks are caught by it unawares and complain.
The public is fair game.

Citi had quite a record of bad behavior around the world a few years ago (
Citi
Never Sleeps ):

In mid-2004, the Japanese regulatory authorities found a number of irregularities
at Citigroup’s private banking unit, the most lucrative business serving exclusively
to high-net-worth customers in the country. In particular, the authorities found
that the bank failed to prevent money laundering and offered loans to clients
engaged in nefarious activities ranging from tax evasion to stock market manipulation.
In addition, the authorities also claimed that the bank misled local customers
about investment risk and overcharged for several financial services. The extent
of Citigroup’s involvement in such scandalous activities was so pervasive that
the Japanese authorities decided to close down its private banking unit. In
addition, Citigroup was barred from participating in government bond auctions
in Japan. Embarrassed by this scandal, Citigroup not only sacked its top executives
in the private banking unit but also did not contest the findings of regulatory
authorities.

The Italian authorities restructuring the bankrupt Parmalat debt are seeking
$10 billion in damages from Citigroup in a lawsuit filed in the New Jersey for
exploiting Parmalat’s financial position. The lawsuit is aimed at recovering
cash paid to several banks before Parmalat went bankrupt in December 2003. In
turn, Citigroup has legally challenged the restructuring plan of Parmalat.

A fine of $250000 was imposed on Citigroup’s subsidiary by NASDAQ distributing
misleading information and sales literature on hedge funds between July 1, 2002
and June 30, 2003.

Very recently, Citigroup paid damages totaling $2.6 billion for claims arising
from WorldCom’s bankruptcy. The bank also made provisions of more than $5 billion
against potential claims arising from Enron and other scandals.

The South Korean authorities have also launched a full investigation into
Citigroup’s private banking operations and some foreign exchange transactions
suspected to be related with money laundering and criminals.

The Reserve Bank of India, country’s central bank, has fined Citigroup for
allowing scamster Abdul Karim Telgi and his associates to open accounts and
park their dirty money raised through printing and selling fake stamps.

Money corrupts, and under-regulated banks that have the power to create money
out of thin air can corrupt all that they touch: regulators, media, exchanges, economists,
politicians.

Essentially there are two markets:

One market is for 401K investors were gains are non-existent and most participants
are unable to beat inflation in 10 years period frame. For most investors 401K
is just a tax on retirement earning.

The second is speculative market of hedge funds and major Wall Street firms
that feeds on the first and use it for self-enrichment via huge bonuses (inflated
by fraudulent, Enron-style accounting) and dubious operations. The latter
include illegal naked short selling, high frequency trading, derivatives, stock
manipulation, and the destruction of public companies. Here huge money are made
by few well connected players like Goldman Sachs. See
Deep Capture Blog

In reality workers were simply invited to spend in casino their retirement money:
the long-term financial interests of workers became directly tied to the fortunes
of Wall Street and they instantly became feeding ground for Wall Street sharks.

The US pension system is entirely inadequate. Social Security, which came into effect
in 1935, provides to this day a very limited benefit that can prevent starving
but not much more. It was never conceived as being more than a supplemental pension.
Defined benefit pension plan were a very good development but even at its height,
fixed pensions covered only a fraction of the workforce; mainly large manufacturing
unionized industries such as auto and steel.

The 401(k) became the new model for
pensions during the 1970s recession. Faced with the economic downturn, major corporations,
with the collaboration of the unions, began severing long-term commitments to their
employees. According to the authors of
The Great 401(k) Hoax, “It wasn’t the current cost of pension plans that
most frightened corporate America. The real financial trauma was the implication
of these obligations for the future of corporate balance sheets. Long-term pension
liabilities were virtual black holes.” Here is one Amazon review of the book:

A good perspective on the risks inherent in 401k plans,
July 13, 2005 By (Shelton, CT USA) -
See all my reviews

The authors set out to prove that 401k plans are inherently risky and
in many cases inadequate to meet the retirement needs of people. They make
their case by using historical analysis and they manage to do it well. They
draw a parallel comparison between the politics, culture and economics of
the 1920s and the 1990s. Just as the 1920s led to the Great Crash and the
Depression, the new millennium looks ready for similar economic hardships.
This can have a devastating effect on the retirement plans for most Americans.

Before 401(k) plans came into the picture, "defined pension plans" had
become popular ( though not as popular as 401k was eventually to become).
Those were the Golden years of the American economy (1945-1973). It represented
a certain commitment by American companies to their workers. Most companies
were doing well in those years and could guarantee the monthly pension checks
to retirees.

As America suffered slow-growth years from 1973 to the mid 90s, the solution
that emerged for improving corporate balance sheets was simple: Design a
pension system that depended not on defined benefits for employees but on
defined contributions made mainly by employees. As corporations were having
more trouble making money, the 401(k) became the new model for pensions.

Various other factors contributed to Americans shifting more and more
of their assets into stocks/Mutual funds/401k plans over the years:

First is the Wall Street propaganda resulting from the massive
drive to capture the public's resources. Andrew Smithers, the brilliant
British financial analyst, once told the authors that he could make
a lot of money by being a bull and being wrong than by being a bear
and being right.

Delusive academic research, demonstrating that stock investments,
patiently made over the years, were a safe and superior source of investment.
Professor Jeremy Siegel's book "Stocks for the Long Run" has been one
of the most respected sources of delusion. To Siegel, the failure to
grow rich is an individual's failure to save enough or to be patient,
not of the way in which society as a totality works.

The economic boom years from 1995-1999 provided much incentive
and validated the Wall Street propaganda and the delusive academic research.

The authors discuss the various evils in the stock market, the current
American economy and the 401k plan. They propose various reforms such as
banning of company stock contributions, allowing employees to shift their
funds at any time they want to, keeping transaction fees low and discouraging
conflicts of interest between employees and their corporate employees.

Until new legislation arrives to fix our 401(k) plans, we are stuck with
what exists. Investing in Inflation-indexed government bonds, though not
frequently made available in 401(k) plans, come across as the best way to
plan for retirement in the current situation.

This book is worth a read just to get a historical perspective of the
US economy and of the retirements plans that existed through the times.

401K investors serve very similar to plankton role of feeding ground for Wall
Street. That's why it is more correct to call them not investors, but donors: few
401K investors make any money after inflation. Most lose as they need to feed other
financial animals higher in the food chain. Inability to move against the
current in this context first of all means inability to determine real risk of investments
and that fact that the types of funds 401K investor can invest in are fixed by often
very unfair corporate 401K plans.

The role of 401K investors is very similar to the role of plankton
in the marine food chain. They serve mainly as a feeding ground for Wall
Street whales. That's why it is more correct to call them not investors,
but donors: very few 401K investors make any money after inflation.

In general investment community looks a lot like a marine food chain. Complex
and evolved creatures like whales are at the top of food chain and depends for their
feeding on simple plankton directly or indirectly, eating fish that feed with plankton.

In the financial community, the plankton is some guy who buys the stocks or bonds
for his 401K plan dreaming about it appreciation. And the guy who buys the house,
dreaming about its appreciation. Both the buying operation itself and the ability
to short or buy on margin and using derivatives are generally higher in the financial
food chain. The problem is that like in many ecosystems plankton is became more
and more scares: the USA does not manufacture many things, and the percentage
of 401K investors with good paychecks have been shrinking. So Wall Street need to
stimulate remaining plankton to spend more of a paycheck in order to survive.
This is done usually via Ponzi schemes (and during any bubble stock market is nothing
but a special case of a Ponzi scheme). Without Ponzi schemes and naive investors,
they would starve.

There are several reason for this situation and one of them is the restructuring
of the USA society that took place during the last 25 years (so called Reagan revolution).

Bushonomics is the continuous consolidation of money
and power into higher, tighter and righter hands

George Bush Sr, November 1992.

Neoliberalism (aka Casino capitalism aka Reaganomics) is new economic reality, a new economic system into which capitalism
transformed itself at the and of XX century. And the essence (as in above
definition of Bushomonics) is the consolidation of money and power to the top 1%
or even 0.01%. Our new lords are not that different from feudal
aristocracy, may be only less educated, more prone to avoid military service and
much more greedy.

under neoliberalims FIRE (finance, insurance and real estate) sector
became dominant (which happened around the world around mid 90th, but to greater
extent in the USA then elsewhere).

Ideology of neoliberalism is "market fundamentalism" was and still
is a powerful political
movement which came to the front stage in early 80th and was not that different
from the religious fundamentalism:

Market Fundamentalism is the exaggerated faith that when markets are left
to operate on their own, they can solve all economic and social problems. Market
Fundamentalism has dominated public policy debates in the United States since
the 1980's, serving to justify huge Federal tax cuts, dramatic reductions in
government regulatory activity, and continued efforts to downsize the government’s
civilian programs.

Five centuries ago, Niccolo Machiavelli explained how to undertake a revolution
from above without most people even noticing. In his Discourses on Livy, he wrote
that one

"must at least retain the semblance of the old
forms; so that it may seem to the people that there has been no change in the
institutions, even though in fact they are entirely different from the old ones."

Reagan followed Machiavelli's advice very closely. Actually Reagan himself used
the word "Reaganomics". In a July 10, 1987 White House Briefing for Members of the
Deficit Reduction Coalition, he said,

Neoliberalism was reaction to stagnation of manufacturing in late 70th and
try to overcome it using complete "financization of the economy":
freeing investment banks from all previous restrictions and constrains imposed by
New Deal as well as repealing of key legislation from this era. In a way adoption
conversion of the USA into neoliberal model meant that Great Depression was wiped out from the country institutional
memory and new players were eager to repeat the early XX century mistakes on a new
technological level. It was, in essence, commitment of the US government to give
FIRE industry green light and abolish all speed limits as well as wiping out capital
intensive manufacturing industry in the US as part of a drive to increase short-term
profit opportunities in the financial sector. Conversion of the USA into new Switzerland
so to speak...

Neoliberalism got tremendous short in the arm by the dissolution of the USSR which gave US economics
a half billion of new customers, huge region to dollarize and buy assets for
pennies on a dollar and ensured prosperity of 1994-2000.

Gradually via "Quiet coup" financial sector became top political power
at Washington, DC making the process irreversible. Like senator Durbin explained:

And the banks -- hard to believe in a time when we're
facing a banking crisis that many of the banks created -- are still the most
powerful lobby on Capitol Hill. And they frankly own the place," he said on WJJG 1530
AM's "Mornings with Ray Hanania.

For example Gramm-Leach-Bliley which legitimized credit default swap, along with
the repeal of Glass-Steagall (with no enforcement or oversight of the newly liberated
“Financial Services”), led directly to the problems we are experiencing today.

The important part of neoliberalism is a "counter-revolution" of the old elite.
And that means return to Feudalism with its top 1% and the decimating the middle
class which enjoyed unheard of prosperity during a half of the century
(1945-1995)l. Neoliberalism in general is characterized by political dominance
of FIRE industries (finance, insurance, and real estate) as well as tremendous growth
of inequality. In the latter sense it is similar to Guided Age. In
Martin
Wolf's words its defining feature is "the triumph of
the trader in assets over the long-term producer" It was serviced by pseudo scientific theories
of Milton Freedman and supply side economics (Economic Lysenkoism). As one
comment for Krugman article
Was the Great Depression a monetary phenomenon stated:

Market fundamentalism (neoclassical counter-revolution — to be more academic)
was more of a political construct than based on
sound economic theory. However, it would take a while before
its toxic legacy is purged from the economics departments. Indeed, in some universities
this might never happen.

Actually, this is more like religious doctrine than political philosophy — and that
could be a bigger problem.

Minsky defined three stages of Casino Capitalism, each of increasing fragility:

Hedge finance: income flows are expected to meet financial
obligations in every period.

Speculative finance: the firm must roll over debt because income
flows are expected to only cover interest costs.

Ponzi finance: income flows won’t even cover interest cost,
so the firm must borrow more or sell off assets simply to service its debt.

Essentially Bushonomics is the Ponzi finance stage of Casino Capitalism.
One out of many definitions of Ponzi Scheme is: transfer
liabilities to unwilling others. And the name casino capitalism suggest
that they are playing with your money, including your 401K money

We are living at the Ponzi finance stage of Casino Capitalism.
And the name casino capitalism suggests that they are playing with
your money, including your 401K money...

There were derivatives exploding all over the world and the rating agencies basically
admitted that they didn't understand the structuring of these new products, but
it would be a mistake to not capture some of the market action and earn some bucks.
Not only the rating agencies and government regulators (and first of all Greenspan's
Fed and SEC) were totally unaware of what was going on, They wanted to be unaware.

Criminal negligence of regulators was connected with
the "free market fundamentalism", the political agenda of The Bush Ownership
Society, based on total lack of regulation and accountability. Similar
to Great Depression this is unfolding as " The Perfect Storm!". Too many people
at high positions got greedy (aka demonstrated high tolerance for risk), and this
resulted in massive bad investments and the United States and Europe. As a result
most major banks are now massively in debt and barely able to meet the interest
payments. As one commenter to the Naked capitalism post
Why the Failure to Understand the Global Financial System noted:

hahaha, they understand it Yves. They really get it. But you have to
understand, the whole point of government is to protect corporations and
banks.

The vast majority of people just provide
cheap labor.Obama and Co are
pretty smart people but they protect the interests of the elite first.

Everyone knows there was massive fraud and greed going on, but no one
is going to do a thing. A few fish here and there will get fried but otherwise
same old, same old.

It is the Bushonomics that brought the USA to the point of near bankruptcy.
This implementation of this radical economic ideology by the Fed (led by Greenspan),
U.S. Treasury (led by Rubin) and major regulating agencies (SEC, etc) created a
threat (and eventually damage) to the country in comparison with which most acts
of radical Islam in terms of economic damage to the USA look like teenagers pranks.
I am not sure if many people fully understand the real level of risk they of “structured
finance”.

The major players in implementing Bushonomics were Greenspan, Rubin, Gramm along
with three last presidents (Bush I, Clinton and Bush II). The key was complete
deregulation of financial sector along with reckless monetary policy. As for deregulation,
if we compare national banking system with the national transportation network it
was much like moving state police from patrolling highways to patrolling just areas
in front of Dunkin’ Donuts ;-). At the beginning there were two important
events that shaped subsequent development of Bushonomics which are important for
401K investors to understand:

Move to electronic clearing:

The interesting thing is that if we look at the original movement to
electronic clearing, we can see that due to physical constraints paper certificates
were indeed a drag on operations. Nobody who has been around markets for
30-40 years would argue otherwise. The problem was that the masses could
not implement electronic clearing in the 70’s and early 80’s. Only big institutions
could afford the computers and programmers at the time (the PC was still
just a glimmer). The “bridge” solution was to allow the big brokers to implement
electronic clearing and to invite the masses to participate by holding securities
in “street name”. The security’s owner was Cede & Co. (DTCC nominee name).
Under existing law the DTCC became the legal owner of the security. You,
the one who ponied up the money, are the “beneficial owner”. This is why
there is no direct correspondence between you and the issuer of the security
you ‘bought’. The correspondence is all via proxy (usually your broker).
With both electronic and paper clearing coexisting side by side, there was
always room for discrepancies to crop up and literally no way to systematically
verify the source of the discrepancies. In short, the system greatly increased
efficiencies and it was recognized that these discrepancies were the ‘cost’
of progress.

However, the ‘brilliant’ minds at the investment banks soon realized
that these “street name” securities could be manipulated to their benefit.
In fact, these securities can be counted as
the investment bank’s own collateral!When you pony up your money you are effectively
giving the broker free money (actually they have the gall to charge you
for the money you give to them). Due to the way the system
works coupled with direct broker to broker transactions, the DTCC can never
be sure that what its records have agree with what actually is occurring
(the DTCC’s records are supposed to reflect reality, but there are too many
holes and discrepancies for it to actually attain that goal). The end result
is that the investment banks have had access to free capital via the ’system’.
This was akin to the fractional reserve scheme granted the C-banks! Only
better!

Establishing 401K plan which provided huge pool of "street name" securities
for investment banks to play with

In 1978, Congress amended the Internal Revenue Code by adding section
401(k), whereby employees are not taxed on income they choose to receive
as deferred compensation rather than direct compensation.[2]
The law went into effect on January 1, 1980,[2]
and by 1983 almost half of large firms were either offering a 401(k) plan
or considering doing so.[2]
By 1984 there were 17,303 companies offering 401(k) plans.[2]
Also in 1984, Congress passed legislation requiring nondiscrimination testing,
to make sure that the plans did not discriminate in favor of highly paid
employees more than a certain allowable amount.[2]
In 1998, Congress passed legislation that allowed employers to have all
employees contribute a certain amount into a 401(k) plan unless the employee
expressly elects not to contribute.[2]
By 2003, there were 438,000 companies with 401(k) plans.[2]

Originally intended for executives, the section 401(k) plan proved popular
with workers at all levels because it had higher yearly contribution limits
than the
Individual Retirement Account (IRA); it usually came with a company
match, and in some ways provided greater flexibility than the IRA, often
providing loans and, if applicable, offered the employer's stock as an investment
choice. Several major corporations amended existing
defined contribution plans immediately following the publication of IRS
proposed regulations in 1981.

A primary reason for the explosion of 401(k) plans is that such plans
are cheaper for employers to maintain than a
defined benefitpension
for every retired worker. With a 401(k) plan, instead of
required pension contributions, the employer only has to pay plan administration
and support costs if they elect not to match employee contributions or make
profit sharing contributions. In addition, some
or all of the plan administration costs can be passed on to plan participants.
In years with strong profits employers can make matching
or profit-sharing contributions, and reduce or eliminate them in poor years.
Thus 401(k) plans create a predictable cost for employers, while the cost
of
defined benefit plans can vary unpredictably from year to year.

The danger of the 401(k) plan is if the contributions are not diversified,
particularly if the company had strongly encouraged its workers to invest
their plans in their employer itself. This practice violates primary investment
guidelines about diversification. In the case of
Enron, where the accounting scandal and bankruptcy caused the share
price to collapse, there was no
PBGC insurance and employees lost the money they invested in Enron stock.
Congress inserted trust law fiduciary liability upon employers who did not
prudently diversify plan assets to avoid the chance of large losses inside
Section 404 of ERISA, but it is unclear whether
such fiduciary liability applies to trustees of plans in which participants
direct the investment of their own accounts.

Those two tendencies collided with the decision of elite to convert the country
from large factory to a large casino. Like in Gilded Age in the unforgettable words
of George Bush Sr., that resulted a strong movement toward "the continuous consolidation of money and power into higher,
tighter and righter hands".

That means that from the very beginning the proper name for 401K investors would
be 401K donors. And the name of the game were fees for financial institution and
their ability to use the pools of investment supplied by 401K investors as collateral
for their more risky and more profitable operations without or with very little
responsibility. As WSJ stated (Some
Consumers Say Wall Street Failed Them - WSJ.com):

Thirty years ago, a typical consumer had a fixed-rate mortgage, a life-insurance
policy, a bank account and an employer-paid pension plan. Nowadays, that same
consumer may have a payment option adjustable-rate mortgage, a 401(k) retirement-savings
plan, a home-equity line of credit and perhaps even a health-savings account
instead of traditional employer-sponsored health insurance.

In the process, risks previously borne by big
banks and employers have been placed squarely on the shoulders of consumers.
Individuals increasingly bear the risk of interest-rate fluctuations, rising
health-care costs, stock-market gyrations and outliving their retirement savings.

Essentially 401K accounts is a way to extract "Wall Street tax" from hapless
401K donors, not to help you with the retirement. That means that what matter
most for 401K investors is not the return on your money,
it's the return of your money. Given restriction
of 401K plans to a small set of pre-selected mutual funds (often with high fees)
beating inflation is an achievement that should not be underestimated: most 401K
investors lose money, not gain money, during their 15-35 years investment cycle.

Most middle-class 401K investors should be more correctly
called "401K donors". What matter most for 401K investors is not the return on your money, it's
the return of your money.

Financial intermediaries represent an additional tax on economy, the same way
as defense and lawyers. In 1980, financial firms accounted for 8% of S&P earnings.
During the peak of our last stock market cycle, their profits were over 40% of the
total. That's a significant tax that people, including 401K investors, need
to pay. It is ironic that free market
fundamentalists have so vociferously argued for "free markets", without understanding
(or perhaps understanding all too well) that the house always wins. And that means that you always lose...

While it's true that "no one goes to
Wall Street to save the world" it is equally true that no one on Wall Street
should be permitted to destroy our 401K savings...

Even without privatizing social security the things became very interesting
for 401K investors: both dot com bust and subprime bubble bust plunge proved that
the shift from traditional (defined benefit) pension plans to 401K-based ( "defined
contribution") plans was the "rip off of the century" for middle class. And 401K
plan is as close to scam as one can get. Not only it shifted all the market risks
from the corporate balance sheet to the individual, it also shifted the source of
funding as meager "match" (usually around 4%) did not compensate even half of traditional
(defined benefits) corporate pension plans.

Both dot-com bust and subprime bubble bust plunge proved that the
shift from traditional ("defined benefit") pension plans to 401K-based ("defined
contribution") plans was the "rip off of the century" for middle class.

Here is pretty telling quote from the Associated Press about implicit conflict
of interest of Congress:

Lawmakers' retirement benefits start earlier and accrue faster than in plans
offered to other federal workers, or by the average private company. Lawmakers
also get cost-of-living increases, increasingly rare in the private sector.

Only 5 percent of private sector workers have
defined benefit pension plans, in which the employer pays into
an account and promises them benefits based on years of service, salary levels
and other factors. That's down from 1980, when 60 percent of workers had such
plans, according to the Center for Retirement Research at Boston College.

Increasingly, employers are putting the responsibility for retirement --
and the risk -- onto workers themselves by switching to investment plans like
401(k)s. About 30 percent of workers have 401(k)s, in which employees contribute
to their own accounts, often with employers matching a small percentage of contributions,
according to the Employee Benefit Research Institute. Thirteen percent have both defined-benefit pensions and 401(k)s.
The remaining workers don't have retirement coverage from their employer, according
to the institute.

Despite the financial crisis -- and the fact lawmakers' retirement benefits
are out of step with most ordinary Americans -- Congress has made no effort
to revisit its unusually sweet retirement deal.

Rep. Howard Coble, R-N.C., who has declined participation in either the congressional
pension or thrift savings plan, said his efforts to scale them back have not
been welcomed.

"It would certainly be a timely gesture at this juncture," said Coble. "It
certainly appears to be a different standard and I can see how people on the
outside of that standard might resent it."

The generous retirement arrangement for members of Congress is meant to respond
to the job insecurity that comes with elected office, according to Barbara Bovbjerg,
director of education, work force and income security issues at the Government
Accountability Office.

Members elected before 1984, like Miller, get a better deal on their pensions
than do those elected since, because the rules changed that year to bring lawmakers
into the Social Security system as well.

But any member with five years of service is
eligible for full pension benefits at 62 -- though Social Security
benefits conform with those of other workers, with early retirement bringing
reduced benefits. Lawmakers with 20 years in office can get full pension benefits
at 50, younger than most workers.

"The government plans are certainly very rich even if you compare them to
the pension plans in corporate America," said Robyn Credico, national director
of defined contribution consulting at Watson Wyatt, an employee benefits consulting
firm.

"I certainly believe it affects policy," Credico said, suggesting that members
of Congress don't experience the harsher reality of ordinary workers' retirement
plans. "If you're not impacted yourself it's very easy to make different rules."

Indeed, Congress has in recent years promoted
the dramatic movement in corporate America away from defined-benefit pensions
to 401(k)s with policies encouraging automatic enrollment and raising contribution
limits. Under 401(k) plans employees contribute to their own
investment accounts and assume the risks and rewards that go with them. Lately,
with the crisis on Wall Street and across the globe, it's been more risk than
reward.

Earlier this month, Miller's House Education and Labor Committee found that
Americans' retirement plans -- pension plans and 401(k)s included -- have lost
as much as $2 trillion in the past 15 months -- about 20 percent of their value.
At a committee hearing Wednesday in San Francisco, Miller cited new research
suggesting that the losses might be as much as double that.

And although private sector employees with defined benefit pensions are guaranteed
their pensions even if the value of the plan drops, employers may make up for
the extra cost in other ways, like layoffs, cutting other benefits or even freezing
the pension or eliminating it, experts say.

That risk was underscored Wednesday at Miller's hearing in San Francisco,
where he announced that the federal agency charged with backstopping pension
benefits for 44 million Americans has lost at least $3 billion in stock investments
during the last fiscal year on assets of $68 billion, and invested a significant
portion of its funds in mortgage-backed securities. The agency, the Pension
Benefit Guaranty Corp., insures approximately 30,000 defined benefit pension
plans. It does not insure 401(k) plans.

401K plan traditionally are associated with the "stock mania" and for many 401k
investors the dominant part of 401K saving are in stock mutual funds, often diversified
indexes like S&P500. But for the last 12 years (1996-2008) S&P500 real returns
are less then stable value fund. That means that those 40K investors who used
primarily S&P500 or similar large cap funds lost approximately 50% of money in comparison
with stable value fund. that means that they lost 50% of money after inflation or
even more. If this is not a robbery then what is. High way robbery of 401K investors
which occurred during dot-com bubble is repeating now with subprime crises as in
search of returns many 401K investors assumed too much risk moving considerable
part of their 401K saving (often 100%) into stock funds.

The problem is that most "401K donors" did not even realize that they are being
pick pocketed by very smart fellows from Wall Street. As WSJ recently wrote
"the whole 401K complex is merely a fee machine, and
always was." That means that only the most lucky and the most cautious
guys will get back what they put in ( after inflation). Everybody else will get
skimmed... Will Roger, a popular actor, columnist and radio personality,
after 1929 stock market crash quipped: "I am not so much concerned with the return
on capital as I am with the return of capital."

"I am not so much
concerned with the return on capital as I am with the return of capital."

BTW among other famous quotes of Will Roger, who tragically died in a place
crash, are:

The short memory of voters is what keeps our politicians in office."

"We've got the best politicians that money can buy."

"A fool and his money are soon elected."

"Things in our country run in spite of government, not by aid of it."

That quote suggests a very simple test (let's call it Softpanorama 401K reality
test ;-) of your 401K allocation and level of contribution for baby boomers: "Using
Excel try to model the situation in which the stock market is going up 5% a year
till your retirement date, then stock market collapsed 30% the day after you retire,
fully recovers in five years and continue to provides 5% return all years after.
Also assume that bonds provide 4.5% all this period. If this situation
necessitates the limiting of withdrawals to less then 60% of what you are expecting
you might think about a more crash resistant allocation or increase your 401K contributions.

“I am a reporter and I am doing a story on Bernard Madoff's life after
pleading guilty. As part of this I was wondering if you could comment
on what significance he will have in the history of this period. Will
he represent more than a scamster who stole a lot of money from a lot
of people? As Bernie Ebbers and Ken Lay came to embody corporate greed
and deceit, what will Madoff symbolize? I would really appreciate your
insights on this”.

Here is my answer fleshed out in full:

Americans lived in a Made-off and Ponzi
bubble economy for a decade or even longer. Madoff is the mirror of
the American economy and of its overleveraged agents: a house of cards
of leverage over leverage by households, financial firms and corporations
that has now gone bust.

When you put zero down on your home and you thus have no equity in your
home your leverage is literally infinite and you are playing a Ponzi
game.

Noriel Roubini

“The cult of equities is the notion that stocks are special and
should be the centerpiece of a global asset allocation, no matter the
price”

According to Minsky, Ponzi borrowers are those who need to borrow more to repay
both principal and interest on their previous debt: they cannot service neither
interest or principal payments on their debts. They need persistently increasing
prices of the assets they invested in.

By this standard, many US households and businesses whose debt relative to income
went from 65 percent 15 years ago to 100 percent in 2000 to 135 percent today were
playing a Ponzi game. Using homes as an ATM machine and borrowing against
it to finance Ponzi consumption is not feasible any more.

The same is actually true about stock market. The advent of the individual
retirement account and other defined contribution plans helped to create "cult of
equities" creating a new class of investor eager to get into the equity game
and stocks started to reflect more investor enthusiasm and inflow of new funds via
401K accounts then fundamentals. And this inflow of new investors affected
prices in a typical Ponzi scheme style manner. In 1985 individuals held just $750
billion in IRA and DC plans; by the market peak in 2007, that number had rocketed
to $9.2 trillion.

Now let's discuss if 401K plan make US equities market have more properties of
the Ponzi scheme. If this hypothesis is true, than as in any Ponzi scheme
only those who are able to cash out early (the first wave of boomers) will preserve
those gains.

The key two questions are

"What is percentage-wise ownership of
401K investors of total US equities ?".

What is percentage of monthly 401K investors contributions is the overall
monthly growth of equities market in the USA.

If ownership by 401K investors is dominant then US equities market really looks
like a variant of classic Ponzi scheme. As 401K investors own shares
not directly but via mutual funds this question can be approximated by a simpler
to answer question: "What is the percentage of mutual funds holding of all outstanding
shares ? "

"The public has nearly $7 trillion invested in stock funds — $6.4 trillion
invested in traditional stock funds and $479 billion in exchange traded
stock funds. In total, mutual fund assets equal
about one-third of the $19.6 trillion U.S. stock market.
(Many funds invest in international stocks, so the amount of fund assets
as a percentage of the U.S. market is somewhat lower than a third.)"

According to
ICI in
2004 mutual funds owned 22% of publicly held U.S. equity,
which has sparked debate over whether fund flows
drive stock market price levels (and that means that stock market
has distinct features of Ponzi scheme)

In 2000 Fed published paper [PDF]
Mutual
Funds and the U.S. Equity Market generally confirmed this potential
Ponzi scheme like behavior of mutual funds during
market crashes but noted that it was slightly damped by the cash
reserves of the mutual funds. The authors stated:

Total retirement assets increased threefold over the past decade, to
almost $13 trillion in 1999 (table 8).27 Mutual
funds have played an increasingly important role in this growth, accounting
for almost one-fifth of total retirement assets in 1999.
Moreover, retirement assets held within mutual funds have risen significantly
relative to total mutual fund assets, accounting for 35 percent of total
fund assets in 1999. Households have chosen to allocate the bulk of the
retirement assets they hold in mutual funds to equities, thus bolstering
the total share of mutual fund assets allocated to equity funds (table 9).
In 1999, 73 percent of mutual fund IRA assets and 81 percent of mutual fund
defined contribution pension plan assets were invested in equity funds.28
Retirement account assets in mutual funds are much more likely than non-retirement-account
assets in mutual funds to be devoted to equity investments.

...households' decisions to invest new cash
in, or request redemptions from, equity mutual funds significantly affect
equity prices. This possibility can be evaluated by looking
at the relationship between domestic equity fund flows and equity prices.
Net new flows into domestic equity funds as a percentage of the value of
the U.S. stock market have tended to increase over the past fifteen years
(chart 10).29 The monthly percent change in the Wilshire 5000 index of stock
prices over the same period shows that while equity fund flows were becoming
more stable, equity prices were becoming more volatile (chart 11).30
A related development is that the response of mutual fund investors to large
market declines—specifically, the equity price declines in October 1987,
August 1990, and August 1998—has become progressively smaller.

In October 1987, when the Wilshire index
fell more than 20 percent (the worst monthly performance for the stock market
since World War II), domestic equity funds experienced net outflows of more
than $6 billion. This outflow amounted to 0.2 percent of
the total value of the stock market, or just under 3 percent of domestic
equity fund assets; this was the largest monthly outflow as a percentage
of fund assets to date. Indeed, domestic equity funds experienced outflows
in fourteen of the sixteen months following the October crash, outflows
that summed to a net total of more than $18 billion. All told, mutual fund
shareholders withdrew more than 11 percent of domestic equity fund assets
in the aftermath of the October 1987 episode. 31

The next large decline in stock prices occurred in August 1990, when
the Wilshire index fell about 10 percent in the wake of concerns about the
Gulf War in Kuwait and Iraq. In that month, mutual fund shareholders withdrew
about $21⁄2billion from domestic equity funds, which amounted to less than
0.1 percent of the value of the stock market, or about 1 percent of domestic
equity fund assets. Outflows from August through September 1990 were only
$3 billion, or a little more than 1 percent of fund assets. Although the
Wilshire index fell half as far in August 1990 as it had in October 1987,
fund withdrawals during the 1990 episode were less than half those during
the 1987 episode. Domestic equity funds did not experience a net monthly
outflow again until August 1998, when the Wilshire index declined 15 percent
in the midst of the Asian financial market crisis and Russian bond defaults.
Shareholders in domestic equity funds requested net redemptions of about
$61⁄2billion in that month, an amount equal to about 0.3 percent of total
domestic equity fund assets. Domestic equity fund inflows resumed the following
month.

...Although investors have withdrawn money from domestic equity funds
during severe market declines, mutual fund managers have not necessarily
had to sell stocks immediately to cover redemptions. In addition to holding
stocks, equity funds also hold safe, liquid money market assets, usually
referred to as ‘‘cash.'' The proportion of a mutual fund's total assets
held in cash is known as the cash ratio. To the extent that net outflows
can be met by cash on hand, they need not translate into forced sales of
equities by fund managers. The asset-weighted mean cash ratio for all domestic
equity funds has generally been trending down and recently stood a little
above 4 per-cent (chart 12). Despite the decline,
funds have had, on average, more than enough cash on hand to cover monthly
redemptions throughout the past fifteen years.

But the problem is wider in the economy where the total debt to GDP ratio (of
households, financial firms and corporations) is now 350% is a Ponzi economy.
The bursting of the housing bubble and the equity bubble showed that most of the
"wealth" was supported the massive leverage (debt) and overspending of agents in
the economy. It was a fake bubble-driven wealth; now that these bubble have burst
it is clear that the emperor had no clothes and that 401K investors as a whole are
the naked emperor. Wall Street with it bonus fared much better.

Madoff may now spend the rest of his life in prison. But he is just a tip of the
iceberg. The US financial firms tricks with 401K accounts are pretty close to what
Madoff did. Those who populated 401K accounts with crap that lost 50% or more of
value in 2008 knew well what they were doing and why they were doing that.

For Wall Street the cult of equities was enormously lucrative. Indeed, stocks
bought by 401K crowd underwrote a historic expansion of the financial services
industry. And in the booming equity market, other even more lucrative deals like
leveraged buyouts, mergers and acquisitions are possible. ,”

Also bond fund managers are paid 0.5% or less (often 0.25%) to manage bonds, whereas equity
funds usually charge double of that.

The decline of cult of equity is well under way. After two major crashes of stock
market in a decade most investors started to understand the trap they got into.
Bond fund flows are at record highs even as investors lower their exposure to equities.
In 2009, American Funds, the second-largest U.S. fund firm, had lost $21 billion
as of October, as investors pulled money out of its equity funds. Bond fund giants
Pacific Investment Management Co. and BlackRock had inflows as of October 2009,
gaining $66 billion and $8 billion, respectively. Corporations are feeling the impact
of a declining cult of equities too. According to Dealogic, investors bought
more than $2.9 trillion of new corporate bonds worldwide in 2009 through December
2 — a record. That contrasts with less than $2 trillion in all of 2008. That could
impact stocks’ value. In a less robust equity environment, infrastructure became
safer bet and there is a shit within stock toward more safer investment in utilities
and infrastructure related companies. Utilities are less susceptible to different
economic cycles.

Unfortunately inflows into bond funds and FED policies create a huge bond
bubble which was partially deflated in June 2013. Many bond investors lost 10%
of in a month time period.

“The cult of the equity” that arose in the past half-century has come under
attack and may be headed for the dustbin, according to Robert Buckland, Citigroup
Inc.’s global strategist.

The CHART OF THE DAY compares the total returns since 1990 on MSCI Inc.’s
World Index of developed markets and a global government-bond index compiled
by JPMorgan Chase & Co., as Buckland did in a report last week.

“Miserable returns and extreme volatility” in stocks this decade have led
some investors to reappraise their ownership of equities, their favored holding
since dividend yields dropped below bond yields in the late 1950s, he wrote.

And for some time 401K plans with high stocks allocation did OK producing decent
annual returns as baby boomers increased their contribution due to nearing retirement
and the techno bubble lifted the stock market. But after dot-com bust
this Ponzi scheme folded and later tremendous machinations of Wall Street bankers
with securitized mortgages further damaged the confidence in stock markets.

In 2008 it became clear even for the most enthusiastic "stock-only" 401K participants
that they were duped: it will be difficult or impossible to recover 30-50% loss
during the next decade. Environment is just not favorable for huge stocks runs.
That means that those money probably are gone forever (that's why events of 2008-2009
are sometimes called "autodafé of the 401K investors ").

Events of 2008-2009 are sometimes called "autodafé
of the 401K investors"

Relentlessly for soooo many years we were told - this is the way to go -
take control of your own retirement - with all of the many choices to invest
in with the 401k - remember don't worry be happy (Reagan). Well The 401k has
finally been revealed as a massive fraud/Ponzi scheme hoisted onto the American
working and middle class. And we don't hear a single mea culpa - out of anybody
on Wall Street, from any of the right wing talking heads who have been screaming
for years ad nausium the blessings and virtues of the (so-called) free-market
system or certainly nothing -not a peep, not a word- from any of the Republicans
who incessantly mocked Social Security and ANY attempt to direct additional
funds to the underclass and middle class (except of course tax cuts for the
wealthy). We reap what we sow. Please President Obama - do the right thing and
implement the needed changes - especially to support Social Security.

It was a brilliant scam and many participants in 401K plans were simply duped/coerced
into abandoning defined benefit plans and decided to take control (and responsibility)
for their own retirements. But what they did not understand is that company contributions
are minimal and in low interest rate and negative stocks return environment in order
to match previous plan they need to contribute max allowed amount, effectively cutting
their salary 20% (and still bearing all the risks including currency risk).

Investors often look at behavior to forecast what will happen in the
stock market. But consider the effect on behavior from the fall in the stock
market especially if it falls another 50%.

Most people in their 20s-40s have most of
their 401K in stocks. That is what their financial advisors said they should
do.

Even people nearing retirement have a large fraction in stocks, maybe
40%. If the S&P hits 500 like I think it might, they will have lost 2/3
of their retirement money. In addition they will have lost anywhere from
$50K to $200K on their house.

Many will lose their jobs to boot. I find it amazing that you hear economists
predicting that Americans will raise their savings rate to 5%. That doesn't
get them anywhere.

The normal rate was 10% for much of the century. For the past 20 years
it has fallen from 10% to -1%. Savings is a cumulative thing. They need
to overshoot on the upside to get back to 10% averaged over their lifetime.
That means 15-20% savings rates over the next ten years.

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